Microchip FY 2Q17 Earnings Call Notes

Microchip Technology (MCHP) Q2 2017 Results
Steve Sanghi

We have never bought into the notion that 8 bit is dead

“Well, it’s all of the above. We have never bought Street notion that 8-bit is dead, everything is going to 32-bit. That notion has been around from 1994, and I have a cover page EE Times article from that time. And so Microchip has been short for those people since 1994, when the stock was $0.57 in the current currency. So our 8-bit business is extremely profitable, extremely good margins, operating as well as gross. The business did record on core as well as total, as Ganesh mentioned. We are continuing to introduce a large number of new products with new features. We’re garnering new customers, existing customers where businesses are growing. We are not seeing what everybody keeps talking about, but please, everybody keeps talking about because that takes everyone away from 8-bit and turn to something else and we’re enjoying this business quite a bit.”

We’re one of the few companies that continued to innovate in 8 bit

“Yeah. I don’t think it’s necessarily with Bluetooth and wireless. I think there are plenty of areas where people are trying to make devices smart. And if you have innovative new products available as 8-bit microcontrollers, often they are the most cost-effective products to apply to these new systems that are being designed. And we are probably the minority of companies that has innovated to put lots of new capabilities in 8-bit microcontrollers. We are doing that not only on PIC but the Microchip product line before but also an AVR, the Atmel product that we’ve inherited. And I think if you have products that are innovative at the right price point, which are easy to design in to many systems, they will. I don’t think they’re anything related necessarily to Bluetooth and wireless – and Wi-Fi specifically.”

We do all our wafer probe and 60-70% of assembly ourselves

“Now when you look at the back end, Atmel did majority of the assembly and test all at the subcontractors. They did no assembly themselves and 90% of the test was outside. They only did some wafer probe in Philippines. If you compare that to Microchip, we do all of our wafer probe and about 60%, 70% of our assembly and about 90% plus of our test ourselves. So that’s where we see some opportunities where as we compare the assembly and test cost structure, Microchip’s testing technologies, assembly technologies at lower cost than some of that Atmel is using”

Christmas builds have gotten later, partially due to gift cards

” It used to be the case that most of the Christmas builds would be in our revenue in the September quarter because parts get built in Asia. So whatever is being built, equipment gets built by the end of September and gets on ships for six-week journey to U.S. over the ocean and arrives here in time for Thanksgiving when the stores are then full of merchandise. That used to be the case. Increasingly in the last five years plus, what we have seen is the Christmas build is later and later and later. Nobody rushes to build it in September anymore. Parts get built all the time in October and November. A lot of it gets shipped by air rather than getting shipped by sea. And even the heavy items sometimes it gets shipped by the sea and they arrive in November and December. And many a times, there are IOUs where certain product is not available before Christmas, and you put an IOU under the Christmas tree and then you take delivery in January. A lot of the gift card giving has driven that also where people kind of gift gift-cards and then they’re actually buying the merchandise in January. So the entire Christmas buying, which largely used to happen prior to the end of September, is now really spread out.”

Microccontroller market is competitive

“Well, people ask us the same question when Freescale was getting acquired. They asked us the same question when Renesas was forming with NEC, Hitachi, Mitsubishi. And now we’re getting the same question with NXP. And I think microcontroller market remains competitive. There are a number of players. We compete with Renesas, NXP, STMicro, Microchip, and others, some smaller players. The market remains vibrant and competitive and Qualcomm purchasing NXPI would not really change anything, because Qualcomm was not a microcontroller supplier. So the same product line that NXP had will continue, and we’re not seeing any change now. Although the close of the acquisition is about a year away, we’re not expecting to see any change coming out of that.”

Not clear Qualcomm any different

“It is not clear that Qualcomm’s sales force had a similar focus in NXPI, and then they didn’t have a sales force to call on all of the thousands of NXPI customers. as much of a distribution line. We didn’t think Qualcomm had factories themselves where NXPI could leverage. So there were reasons for that acquisition, whatever Qualcomm’s reasons were to diversify. It’s not clear to us that in terms of the microcontroller and analog offerings of NXPI, the Qualcomm acquisition makes them anything different, which could be troublesome to us. We don’t see that.”